The Taxonomy Regulation sets requirements for the management of tax risks
In previous articles on Tax matters, we have touched on, among other things, the increased focus on transparency in the tax area as well as the need and importance of having a robust model in place regarding the management of the company's tax risks. Now these topics are also included in EU's Taxonomy for Sustainable Investments.
The issue is now brought up again in connection with the European Commission's expert group Platform on Sustainable Finance, published its final report Final report on minimum safeguards around so-called minimum protection measures linked to the EU's taxonomy for sustainable investments, The Taxonomy Regulation (in Swedish). The purpose of these protective measures is to ensure that the companies that are considered to conduct environmentally sustainable operations according to the Taxonomy Regulation also meet the requirements set on social sustainability, where tax management has been identified as one of four core areas (in addition to, for example, labor conditions).
What is the Taxonomy Regulation?
The Taxonomy Regulation entered into force on 1 January 2022 and has a clear connection to the EU's Green Deal and also The Paris Agreement. It is a set of regulations aimed at helping investors identify and compare sustainable investments. It does so by creating a common classification system for what can be considered to constitute an environmentally sustainable economic activity.
The regulation is based on six environmental goals:
- Mitigation of climate change
- Adaptation to climate change
- Sustainable use and protection of water and marine resources
- Transition to a circular economy
- Prevention and limitation of environmental pollution
- Protection and restoration of biodiversity and ecosystems
There are currently established criteria for the first two mentioned goals, while the criteria for the other goals are currently being developed. As of January 1, 2023, the regulation will be extended to also include water and marine resources as well as the transition to a circular economy.
What is a sustainable activity?
In order for an activity to be considered sufficiently sustainable according to the regulation, three requirements must be met:
- The activity must significantly contribute to at least one of the six environmental goals
- The activity must not cause any damage to any of the other five environmental goals and
- The activity must meet the minimum protective measures set out in the regulation.
In short, it can be said that the safeguards have been put in place to avoid investments being classified as sustainable from an environmental perspective while not achieving certain minimum levels in terms of social sustainability and/or governance, such as labor law aspects, corruption or tax evasion. In cases where companies do not meet these minimum levels, they are not considered to act sustainably enough to be classified as a sustainable investment according to the Taxonomy Regulation, which is why companies should already now start reviewing these aspects.
Minimum safeguards related to companies' tax management
As mentioned above, the management of tax risks by companies and organizations has been considered to be such an important area of sustainability that companies cannot be considered a sustainable investment according to the Taxonomy Regulation if the management of tax risks is not at a sufficiently high level.
According to the report, companies that meet the following criteria are considered not to work sustainably enough with their tax risks:
- The company does not treat tax governance and compliance as important elements of oversight, and there are no adequate tax risk management strategies and processes in place.
- The company or its subsidiaries have finally been found to have violated tax laws.
The above-mentioned report lacks detailed information about which routines and processes must be in place within the tax area in order for the requirements to be considered fulfilled. Instead, the report refers to the guidelines set out in OECD Guidelines for Multinational Enterprises and GRI 207: TAX 2019.
Which companies are covered?
The companies that are currently covered by the EU directive on non-financial reporting (NFRD) and the EU regulation on sustainability-related information (SFDR) are also covered by reporting according to the Taxonomy Regulation. Even the companies that are covered by the Annual Accounts Act's requirements for sustainability reporting, are companies of general interest according to Article 2.1 a-c of Directive (EU) 2013/34/EU and have an average of more than 500 employees during a year, have an obligation to report according to the Taxonomy Regulation.
The upcoming reporting according to CSRD initially covers large companies and listed companies that meet two of the following three criteria:
- turnover exceeding EUR 40 million or,
- more than 250 employees or,
- a balance sheet with a net worth exceeding EUR 20 million.
In addition to the companies that are already covered by NFRD and SFDR today, unlisted large companies will also be covered through the implementation of CSRD (in Swedish). The taxonomy regulation with the minimum protective measures, including the one on tax management, will in future cover an increasingly wider circle.
It will also become mandatory for the sustainability reporting to be reviewed by a third party, for example an independent auditor.
The Taxonomy Regulation's requirement for a robust model for managing tax risks and avoiding tax evasion is the latest international regulation that clearly links sustainability and tax. This is in the light of, among other things, GRI 207:TAX 2019, which stresses the increased focus and expectation that companies and organizations incorporate management of tax risks in their sustainability work.
As we have mentioned above, the report lacks detailed descriptions of what must be in place for the requirements to be considered met. Given the connection to guidelines published by both the OECD and the Global Sustainability Standards Board (GSSB, GRI 207), our assessment is that companies and organizations will be expected to have a clear tax policy and strategy in place together with a solid model for managing tax risks that identifies risks and ensures regulatory compliance and correct payment of taxes and fees. This is of course for the companies that are covered by the Taxonomy Regulation today, but also the companies that will be covered by the regulations as this develops in the future.
Feel free to contact us for further discussion about what these changes mean for your company!
Marcus Hammarstrand & Eva Jigvall
Eva Jigvall and Marcus Hammarstrand work at PwC’s offices in Stockholm and Gothenburg. Eva works with international corporate taxation focused on the financial sector. Marcus specializes in international transactions.
Eva: +46 72 561 53 28, firstname.lastname@example.org
Marcus: +46 10 213 14 34, email@example.com
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